China-ASEAN FTA: Who wins?

Michael Vatikiotis , Vientiane

China is fond of characterizing its ties with neighboring Asian nations as built on a foundation of "win-win" for all. But just who wins in a China-ASEAN free trade area is a matter of debate -- and also a matter of time.

On the face of it, creating a single market of almost two billion people with a combined gross domestic product of US$2 trillion cannot be bad for business. Yet some of China's trading partners are starting to learn that China's economic embrace isn't quite as warm and friendly as Beijing's smiling leadership would have us all believe.

Take the case of Thailand, where in actual fact, bilateral talks on a bilateral trade pact with China were suspended at the end of July. The Thai government said that it was suspending the talks to avoid duplicating tariff-cutting measures under the broader regional framework. But in reality, the reason was that opening up Thailand's market to a free flow of Chinese agricultural products has hurt Thailand's farmers and they are beginning to squeal. The government wants to avoid annoying voters ahead of expected elections in January or February next year.

China trumpeted its so-called "early harvest" agreement on agricultural goods with Thailand as the harbinger of free trade to come in the region. But with Thailand's markets flooded with Chinese garlic, lychees, oranges and apples, Thai farmers have found it hard to compete on price.

Neither has it been plain sailing to get Thai products into China. Thailand's tropical fruit is more perishable than China's temperate produce, and exporters cannot afford the long delays at customs that they have experienced in China. Perhaps this will change once the Kunming to Bangkok highway is completed in 2007, as envisaged in the agreement signed this week in Vientiane.

It's not just a matter of apples and oranges in the long term. Right now China boasts a deficit in its $100 billion worth of two-way trade with ASEAN. That's because China is sucking in raw materials from ASEAN to feed its voracious appetite for energy and primary commodities like palm oil and rubber. The ten member states taken together comprise China's fourth biggest source of imports.

But longer term, this balance will shift in China's favor as the mainland's companies start exporting consumer goods to ASEAN and consumers begin to favor cheaper Chinese brands over more expensive Japanese and Korean goods. ASEAN's consumers are already buying Haier refrigerators and TCL television sets in increasing numbers.

Some Chinese consumer product companies have started to build manufacturing plants in ASEAN and it's only a matter of time before China becomes the chief supplier of household appliances to the region. This will hurt local manufacturers and make it hard for countries like Malaysia with its Proton cars, or Singapore with home-grown brands of digital technology to keep these companies competitive.

Fears of being obliterated by more efficient Chinese companies will in all likelihood throw obstacles in the path of a smooth transition to tariff-free trade between China and ASEAN. Indonesia is lukewarm at best about the idea, and all ASEAN countries have perfected the art of defending a so-called sensitive list of goods on which tariffs are preserved.

Realistically, though, ASEAN has no choice but to hitch its fortunes to China's growing economy and hope that it will be a case of all ships rising at the same time. China attracted more than $50 billion in foreign direct investment last year compared with around $20 billion that came ASEAN's way.

That's no to say that ASEAN cannot and should not redouble efforts to make itself attractive to investors. Shrewd investors search for alternatives and fears of a credit crunch or downturn in China's economy makes Southeast Asia, with its better banks and high consumer incomes, a good bet. A more integrated ASEAN market will help enhance the region's allure.

It is therefore praiseworthy that as well as embellishing its free trade agreement with China, ASEAN has also used the Vientiane summit to accelerate the formation of the ASEAN Free Trade Area by scrapping tariffs on cars and other consumer goods three years earlier than scheduled in 2007.

The writer is a former editor and chief correspondent of the Far Eastern Economic Review. He can be reached at michaelvatikiotis@yahoo.com